Many product liability policies exclude cover for liabilities arising out of the insured’s product failing to perform its intended function. In John Reilly v National Insurance & Guarantee Corporation Limited1 the Commercial Court considered how one such efficacy exclusion should be applied.
John Reilly was an engineer supplying fire detection and protection equipment. He installed a fire extinguishing system in a customer’s factory, but when a fire broke out at the factory, a part of the equipment failed to operate, allowing the fire to cause damage.
Reilly’s customer sued and his claim was compromised on terms entitling him to pursue Reilly’s Tradesmen Policy insurers, National Insurance & Guarantee (NIG). The policy included product liability cover. However, cover was excluded for claims arising out of “…the failure of any fire or intruder alarm switch gear control panel or machinery to perform its intended function”.
The court was asked to rule on whether the efficacy exclusion applied and, in doing so, considered the following issues.
1. Was there a failure of “machinery”?
It was agreed that the master cylinder, actuator piston or cylinder valve had failed. Reilly argued that none of the parts was, on its own, “machinery”. NIG contended the system as a whole was “machinery” and a failure of the system was a failure of “machinery”, regardless of whether the system failure was caused by a failure of components that were not in themselves “machinery”.
The court decided in favour of NIG. It was not possible to look at each part of the system in isolation. It did not matter that the root cause was a failure of a part of the system that was not, in itself, “machinery”. The system was “machinery” and it had failed.
2. Did the words “fire or intruder alarm” qualify the whole of the exclusion?
Reilly had installed a fire extinguishing system, not a fire or intruder alarm. He contended that the words “fire or intruder alarm” qualified each of the following words in the exclusion. If correct, the exclusion applied only to fire or intruder alarms and not to a fire extinguishing system, such as the one in this case. NIG contended that the exclusion contained a list of separate items, and that it would operate in respect of Reilly’s machinery.
Reilly’s strongest argument was that, if claims arising out of the failure of a fire extinguishing system to perform its intended function were excluded, there was effectively no cover under the policy. Such an interpretation would mean the policy had no commercial purpose, which flouted good business sense.
However, the court found against Reilly, preferring NIG’s submission that there could still be cover, for example, where a valve blew off causing personal injury or damage to property. On this occasion, there was a failure of machinery and the exclusion operated.
The court’s decision is a useful reminder of the scope of product liability cover. Product liability policies are normally intended to cover tortious liabilities to third parties for personal injury or property damage, but not contractual liabilities, such as a warranty that a product will perform. Where the key risk of a product is non-performance, such as failure to prevent injury or damage, it is highly advisable to check whether the policy provides efficacy cover.